Is FedEx a Good Defensive Play?

With shares of FedEx Corporation (NYSE:FDX) trading at around $97.96, is FDX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework: C = Catalyst for the Stock’s Movement On the positive side, FedEx is expanding higher margin operations, it’s undergoing a strategic cost-cutting program, and revenue has been solid. However, there are many negatives as well, which include:

Weakness in international freight markets

Industry overcapacity

Consumers opting for cheaper and slower transit services

Decreasing capacity to and from Asia (could be a positive, but limits growth potential)

Operating income down 28 percent year-over-year

Operating margin down 7.7 percent year-over-year

Net income down 31 percent year-over-year

FY2013 diluted EPS expectation of $6.00 to $6.20 (strong, but would be a decline)

It should be noted that some of these negatives relate to business realignment. The earnings report is old news, but not many people read the specifics. We’ll get a little specific without going overboard. These are just some simple numbers that offer a clearer view of the situation.

FedEx Ground

Revenue increased 11 percent year-over-year

Operating income of $467 million, up from $465 million last year

Operating margin of 17 percent, down from 18.8 percent last year

FedEx Freight

Revenue of $1.24 billion, up from $1.23 billion last year

Operating income $4 million, compared to $1 million loss last year

Operating margin of 0.3 percent, up from (0.1 percent) last year

FedEx Express

Revenue increased 2 percent year-over-year

Operating income down 66 percent year-over-year

Operating margin at 1.8 percent, down from 5.3 percent last year

Now let’s take a look at some comparative numbers. The chart below compares basic fundamentals for FedEx, United Parcel Service (NYSE:UPS), and Expeditors International of Washington (NASDAQ:EXPD). FedEx has a market cap of $30.98 billion, UPS has a market cap of $80.67 billion, and Expeditors International has a market cap of $7.63 billion.

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Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for FedEx is stronger than the industry average of 0.50.

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T = Technicals Have Weakened

FedEx has performed well over the past year, but the past month has been disappointing. This is directly related to earnings. The question now is if the bar has been set low enough to leave room for upside potential or if this is the beginning of a longer downtrend.

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At $97.96, FedEx is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

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E = Earnings Have Been Steady

Revenue and earnings have consistently improved over the past few years. However, we already known that EPS is likely to decline in 2013.

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When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings. Revenue and earnings have also declined on a sequential basis. This isn’t necessarily a red flag, but it’s certainly not a positive.

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Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

There are two big question marks for the industry at the moment. Which direction is fuel headed? Is the economic recovery real or non-existent without Fed assistance?

Conclusion

FedEx has been a long-term winner, but there are many headwinds at the moment. One of the biggest concerns isn’t company-specific. As the stock market continues its ascent, the dangers of a steep correction increase. And FedEx is not a good defensive play. If the stock market continues to rise and this proves to be a true recovery, then FedEx is a bargain here.